A Guide to Retirement Plans for the Self-Employed
Just because you’re self-employed doesn’t mean you shouldn’t be building up a savings for when you retire. But many self-employed Americans aren’t making it a priority to save for their retirement. According to TD Ameritrade, nearly 70 percent of America’s 10 million self-employed workers aren’t saving regularly for retirement, and 28 percent aren’t saving at all. However, there are several savings options available for those who are self-employed. Ready to start saving your way toward retirement? Read on for some great account options to look into.
1. Solo 401(k)
According to Daily Finance, “In a solo 401(k), you can contribute up to $17,500 plus up to 20 percent of your net self-employment income (business income minus half of your self-employment tax), for a maximum contribution of $51,000 for 2013. Your total contributions cannot exceed your self-employment income for the year.”
If you’re 50 or older, you can make catchup contributions to a solo 401(k) of up to $5,500 for a maximum contribution of $56,500. Daily Finance says that most people can set aside more money in a solo 401(k) plan. Check out 401(k) Help Center for a list of plan administrators. Something to keep in mind: Any of your employees who are 21 or older and work more than 1,000 hours per year for you have to be included in the plan.
2. SEP IRA
If you are a high-earning, self-employed person with no employees, this is a great option for you. According to Forbes, your annual SEP IRA contribution can be as much as 20 percent of your net earnings up to a maximum of $51,000. And a SEP IRA is more simplistic and cheaper to administer than 401(k)s. “A pediatric surgeon client, for example, puts a steady $3,000 a month into a SEP IRA, a number he’s comfortable with based on his lifestyle. Then at tax time, the surgeon sits down with his accountant to confirm that he can make additional contributions to reach the $51,000 max,” reports Forbes.
You do have the option to put a larger contribution in earlier in the year, but in order to do that you need to earn the income to justify the contribution amount. Here are a few rules to keep in mind. The money you put into a SEP IRA counts as an employer contribution, meaning you need to make the same percentage contributions for all covered employees. That even includes part-time employees who are at least 21, have been employed by you for at least three of the past five years, and who earned at least $550 from you last year.
You could also keep it simple with a standard IRA, which isn’t actually designed for someone who’s self-employed but works nonetheless. You can contribute $5,500 per year (or $6,500 if you’re 50 or older), according to Forbes.
4. Roth IRA
The same contribution limits apply to a Roth IRA that do for a standard IRA. However, couples with adjusted gross income over $188,000 and singles with AGI over $127,000 aren’t allowed to make annual contributions. That doesn’t mean you can’t have a Roth IRA, though. All you have to do is fund a traditional IRA and then convert it into a Roth IRA.